Digital transformation and the future of financing in the automotive industry

Łukasz
The changes we’re observing in that sector are multidimensional. You can view them from various perspectives. The main game changers at the moment and for the near future are (ticking off the list on his fingers):
- electric and autonomous vehicles;
- the increasing importance of connected services;
- mobility and sharing services, especially as regards autonomous vehicle mobility;
- the importance and wide use of in-car, financing and insurance data;
- the growing emphasis on ecological considerations, like the switch to hybrid and electric vehicles, changes in the WLTP¹, etcetera);
- the trend for switching from a product-based portfolio to a customer-centric-mobility portfolio.
Kasia
As well as all that, the automotive industry, like almost every other sector, is having to deal with the consequences of COVID-19. The pandemic has affected not only customer behaviour, but also what the manufacturers can offer. Over the past two years we’ve observed a number of things. The reluctance of customers to engage in face-to-face contact, which was particularly noticeable in 2020, has significantly accelerated online retail introductions, virtual ‘visits’ to dealerships, door-to-door car deliveries and so on. Supply chain problems have been, and still are, causing issues with the availability of new vehicles and that’s having an impact on all the OEMs. Longer waiting times for vehicles mean that customers are tending more to buy cars from stock, rather than customised ones. The number of attractive special financial offers and rebates is lower, with a faster delivery date as the main bonus. At the same time, the demand for used cars has increased.
And that brings us to a point where we can start considering a general change in mindset. Will all these aspects accelerate the switch from the asset-based approach to favouring long-term rentals? Or is long-term rental already becoming an old-fashioned way of securing mobility?

Łukasz
In the past, pre-Covid-19 and prior to digital transformation, as well, what captive banks had to accomplish was relatively easy. All they had to do was offer financing options, in other words, credit and leasing, via dealers. Once the customer decided to buy a certain model from a certain brand, they were offered financial services directly while they were at the dealership. This meant that the captive banks didn’t really have to focus on things like marketing. Their situation was fairly simple and stable and their only challenge was retaining the customer and offer new options once the previous credit or leasing had been paid off.
Over the last decade, we’ve observed a marked change in customer behaviour, especially among the younger generation. People who were just entering adulthood and getting their first professional jobs began focusing more on the monthly cost of the credit or leasing, rather than on the model and engine version.
Kasia
That was when the era of budget calculators began. Captive banks have gained a new, relatively easy way of attracting customers by offering the financing options that they are happy to pay.
At present, the main challenge seems to be actually attracting new customers. With a steadily growing interest in overall mobility solutions rather than car-owning, the task facing the captive banks is to offer services that reflect changes in customer behaviour.

Kasia
The shift from asset-based to service-based mobility is inevitable and it could be seen as a threat to the captive banks, since private customers won’t be wanting old-fashioned credit or leasing options. So, the true challenge is to turn the shift into a new source of potential and income for the captive banks.
Łukasz
Mobility as a service, or MaaS, requires relatively new fleets, so an increase in the volume of new cars sold and financed is expected, along with constant fleet renewal. The sheer quantity of cars required by car-sharing and long-term-rental companies represents a huge source of leasing needs that captive banks could meet.
MaaS both facilitates and reinforces upselling, leading to additional profit and bundled offers including vehicle financing, insurances, repairs and maintenance, all controlled by the OEMs and captive banks.
Connected vehicles and the increased importance of data usage are triggering a switch from a transactional-based view to a behavioural-based view, in other words, price per real usage. This will have a positive impact on financial risk for captive banks and companies offering MaaS.

Łukasz By tying young professionals to the brand and its services at the earliest possible stage, before they really start building an ‘assets basket’, by offering a holistic mobility concept, where a person starts as a car-sharing customer and goes on to buy a vehicle from the manufacturer using a traditional financing product.
While captive banks are acting as mobility providers or, at the very least, as mobility-stakeholders, they can serve as major providers of new vehicle sales leads for OEMs, because a mobility customer is less likely to visit dealerships.
Kasia
Not to mention OEMs and their ecosystems, including the captive banks, proposing and providing more customer services, like mobile apps, door-to-door services and bundled offers of leasing renewals, insurances, vehicle maintenance and changing from summer tyres to winter and vice versa. It would make the customer’s life easier and tie them further to brand. In other words, a win–win scenario!
Generally, it’s worth considering that getting a car is not a big, one-off expense. It’s more a way of paying for the interaction with the brand; the possibility of using a car, preferably changing models from time to time, but staying with the same manufacturer.

Łukasz
The start of the online evolution in the automotive industry also marked the beginning of legitimate discussions about the future of dealers and dealerships. For sure, car manufacturers won’t be deciding to close their dealerships any time soon. Everyone knows that looking and touching is an important part of the car-buying process for a great many customers. Potentially, though, dealerships will evolve from being the place where the actual contract is signed to becoming showrooms where customers can familiarise themselves with the models that interest them or simply assure themselves that the decision they’ve reached really is the right one.
The COVID-19 pandemic added to dealers’ headaches when their business was halted overnight, boosting quick wins like video chats, virtual showrooms and similar functionalities, which are all making customers’ lives easier and giving them a wider range of communication tools.
Kasia
That leads to the omnichannel user journey, where offline and online channels exist in parallel, interpenetrating and overlapping in seamless user journeys for different types of car buyers.
Some customers still perceive the dealer as an expert whose position and experience enable him to answer their technical questions, address their concerns and, finally, help them choose the right car. It’ll take a long time to change that. Of course, the machine-learning-powered chat-bots (r)evolution may also play a vital role in the transfer of some responsibilities from dealers to artificial intelligence. Mind you, the technology is still too poor to address all the needs of the sophisticated automotive business.

Kasia
We’ve been collaborating with captive banks for more than a decade now and one thing we see constantly is that it’s really difficult to provide fully generic solutions that are totally reusable in different countries. All captives and international financial institutions are tempted by visions of off-the-shelf solutions, though.
It's not only financial products that differ by market, but also customer habits and behaviours. There are different legal requirements and credit-scoring rules to be addressed, as well, and different systems to be integrated with, not to mention different point-of-sale systems for finalising transactions. This all makes it quite a challenge to provide a unified financial journey from the perspectives of the user and the behind-the-scenes IT systems.
It's common practice to provide reusable core functionality addressing the high-level business and technical needs, together with the flexibility of customisation at the market level.
Łukasz
Paradoxically, additional European regulations, which are usually viewed unfavourably by financial institutions, including captives, may make a positive contribution to more harmonisation of the requirements for the finance journey and, as a result, of the IT systems supporting it. Anyhow, culture and habits continue to vary across different countries and changing them is a lengthy process, so financial institutions won’t be able to get rid of the need for customisation completely.
Maybe the use of machine learning will address the gap in customisation relating to different customers’ behaviour and habits by proposing a finance journey that’s not country-specific, but specific to the target group…?

Łukasz
The direct-to-consumer movement started quite a few years ago now in a great many industries, together with the introduction of e-commerce. Initially, though, it seemed to leave the automotive industry unaffected. For many reasons, it wasn’t, and still isn’t, that easy to buy a car online.
It's a fact that selling vehicles is more complicated than other consumer goods. Much more customisation is possible. The price per unit is much higher. There are also extensive legal regulations governing the purchase. These are all probably the reasons why the OEMs were sure that the digital transformation was something they didn’t need to concern themselves with!
More recently, we’ve been observing how the OEMs have finally started to shift to online sales. To begin with, the process was relatively slow and seemed to be more of a marketing tool than an actual sales channel.
Kasia
Then, with the Covid-19 pandemic, things started to change more rapidly, as significant areas of life and work moved from the real, face-to-face world to the online one. And the car sales industry is no exception, with the emergence of virtual dealerships and so on. With the pandemic, the process of digital transformation transmuted into disruption. At last!
Of course, the maturity of online automotive sales varies drastically between different markets. The majority still see financial tools for credit and leasing simulation and online credit checks mostly as a marketing facilitator for traditional offline sales. At the moment, even the real possibility of online sales attracts customers, but most vehicles are still sold in the traditional way.

Łukasz
Thanks to their long history of close collaboration with OEMs, the captive banks became so confident about the strength of their position on the market that they missed the momentum when the digital transformation began. Even though they’re trying to catch up now, they’re still seen as lacking in agility and innovation. This seems to be the biggest threat to them. Their failure to be vigilant allowed non-captive banks and other institutions to steal part of their market and that’s something they’re confronting now. We can divide the threats they’re facing into three main groups.
There’s the competition from companies offering long-term rentals. The advantage they have is the fact that they’re brand agnostic; they can offer the rental of vehicles produced by different, competing manufacturers. However, it’s a threat that can be mitigated or even taken advantage of; a captive bank can offer financing services to companies offering long-term car rentals.
Next, there’s legislation. The world has finally started to look seriously at climate change and the legislation designed to control it is increasing. The impact on recreational vehicles of regulations like restrictions on diesel, the WLTP and government subsidies for electric cars is unpredictable and may well affect residual value, triggering direct repercussions for captive banks.
Then there’s mobility. Having a car is no longer treated as a sign of wealth. It’s just a means of transport, something that people still want to use, but don’t necessarily want to own. This is a point where captive banks need to find their niche and potential for offering new types of products and services.
Kasia
Another challenge for the captive banks will be a shift in the used cars market. In the past, used cars came from two main sources, post-leasing options or private users. This is going to change. What we’ll be seeing are two new streams of used cars. One will be cars used in car-sharing, cars that are driven by various users. People usually take much better care of the things they own than they do of shared and public items. And the other stream will be used electric cars. The battery is a significant part of the total vehicle cost and its lifetime is limited, which is something potential customers will need to consider. Another factor here is that newer electric vehicles usually charge much faster, which makes older ones less attractive.
The threats are clear, but we also have to remember that captive banks will always have invaluable support from the OEMs, which provide customers tied to the brand and help to win new customers by advertising the brand itself.

After all those insights from Kasia and Łukasz, perhaps you’re wondering how MakoLab supports the financing process in the automotive industry?
The company has been developing finance and insurance digitalisation for more than a decade now. Our online financing solutions empower our clients’ customers by giving them the tools they need to make a decision without visiting a bank or a dealership.
We create applications that enhance the online car-buying experience provided by OEMs and captive banks. Making informed financing decisions takes customers further into the sales funnel and much closer to the transaction. And that’s a game changer.

¹The World harmonised Light-duty vehicles Test Procedure – ed.